Total non-life catastrophe bond market issuance for the first half of 2016 rose to $2.8 billion, according to the latest ILS market update from Willis Capital Markets & Advisory (WCMA), the investment banking business of Willis Towers Watson.

After starting with record-setting issuance in the first quarter, the $2.8 billion in issuance in first-half 2016 is the lowest total since 2012, although this figure still exceeds first-half totals for all years prior to 2012 other than 2007, revealed the report titled “ILS Market Update: When the Wind Blows and the Earth Shakes.”

The report said that $1 billion of non-life catastrophe bond capacity was issued across six transactions in the second quarter, compared with $2.7 billion of non-life catastrophe bonds issued via nine deals in second-quarter 2015.

Three out of these six catastrophe bond sponsors were new issuers—Security First, United Insurance and Credit Suisse—while repeat sponsors included well-known market participants such as USAA, Munich Re and Allianz Risk Transfer, WCMA said.

“Despite the strong first-quarter 2016 issuance, second-quarter take-up has not been as fervent compared to previous years. However, sponsors continue to engage with ILS investors through various other products,” said Bill Dubinsky, head of insurance-linked securities (ILS) at WCMA.

“Decreased outstanding volume created tighter risk spreads in the second quarter for this type of ILS and better relative value for ceding companies versus private deals. We expect this relative value gap to drive increased issuance of liquid ILS in response in the coming quarters,” he said.

“With hurricane season now underway, combined with the expectation that 2016 will be a La Niña year, there is unshakable sentiment among quite a few involved in this year’s June and July 1 U.S. property-catastrophe renewals that reinsurers and ILS investors will both take significant cat losses,” Dubinsky continued.

“What happens next if this comes to pass depends upon whom you ask, but we expect capital will rush into the market post the next event. The historic pricing cycle will not disappear altogether, but temporary capacity shortages and payback will significantly reduce impact compared to the past,” he said.

The WCMA report ran through the varying expectations of the traditional reinsurers, ceding companies and capital markets providers—perhaps after a $75 billion insured property loss from a hurricane with a Florida landfall.

“Traditional reinsurers expect a hard market and payback,” while ceding companies expect to enjoy “the benefits of multiyear capacity—both from the traditional markets and the capital markets—with little price movement as investors quickly replenish any lost capital,” the report said.

At the same time, capital markets investors expect to strengthen their position with ceding companies “as a result of contract certainty and quick claims payments in contrast to coverage disputes with traditional reinsurers,” WCMA affirmed.

“Capital markets investors expect that possible reinsurer downgrades or insolvencies will show the value of collateral,” the report said. “In contrast, reinsurers hope that the value of reinstatements, even at the princely rate of 1@100 percent, will prove the value of a leveraged rated balance sheet.”

As Dubinsky noted, the pricing cycle will not disappear altogether, but the report emphasized that a significant loss from an “unexpected source such as a Texas earthquake” could make the cycle return with a vengeance.

Source: Willis Capital Markets & Advisory